No home-price rebound likely soon

Wednesday

Jul 30, 2008 at 12:01 AMJul 30, 2008 at 9:49 AM

NEW YORK -- More than 800,000 vacant homes for sale stand between the housing recession and the bottom. That glut is driving down home prices, slowing sales and turning consumer psychology against the market.

NEW YORK -- More than 800,000 vacant homes for sale stand between the housing recession and the bottom. That glut is driving down home prices, slowing sales and turning consumer psychology against the market.

New figures out yesterday show that home prices fell by a record 15.8 percent in May from a year ago, with none of the 20 cities surveyed registering a price gain. The Standard & Poor's/Case-Shiller Home Price Index is now down more than 18 percent from its peak in July 2006.

Nine cities posted record declines. Yesterday's home-price figures follow a string of pessimistic housing reports and financial results from builders and lenders. The pace of existing-home sales is the slowest in a decade, and roughly one in five sold is a foreclosure. Consumer-confidence data released yesterday, while breaking a six-month fall, also remains near 16-year lows.

Yet the crux of the housing problem -- why the bottom is still many months away, and maybe more than a year -- is that the percentage of vacant U.S. homes for sale sits just below a record high.

"The key thing is the number of unsold homes out there," said Patrick Newport, a U.S. economist at Global Insight. "That number has to come down significantly before things can get better." And that won't be until 2010, he predicts.

About 2.1 million homes were vacant and on the sales block at the end of the second quarter, Newport said, citing Census Bureau data. In normal times, there would be only 1.3 million homes for sale, he said.

That gulf, swollen by overbuilding and an abnormally high number of foreclosures, could widen through next year. Nearly 2.8 million U.S. homeowners will either face foreclosure, turn over their homes to their lenders or sell their houses for less than the mortgage's value by the end of next year, according to Moody's Economy.com.

That number even takes into account the estimated 400,000 homeowners who could benefit from the housing bill President Bush is expected to sign soon.

While it is regarded as the most significant housing legislation in decades, many think it's too little too late.

"This isn't going to put the bottom in the housing market by any means. It's not a big enough package to deal with continued foreclosures and the fact that housing prices have not yet bottomed," said Joe LaVorgna, chief U.S. economist at Deutsche Bank.

And while lower prices might have helped working-class families who couldn't afford a home during the real-estate boom, in many cases the price declines have been eclipsed by increases in interest rates and gas prices.

Consumer psychology is also playing a significant role, said Dan Ariely, a behavioral economics professor at Duke University's Fuqua School of Business and author of Predictably Irrational.

The boom and bust of home prices, driven in part by scandalous lending practices, have led to an erosion of consumer confidence and loss of trust in market forces, Ariely said, adding that it might take "substantial regulation" to restore faith.

"People are depressed because they lost an understanding of the order of their world," he said. "Everything the market told them turned out to be wrong."

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